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Internal audit: Threading the needle

Internal audit: Threading the needle

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Over recent years, European banks subject to supervision by the European Central Bank (ECB) have been faced with the need to adjust their risk governance models to ensure they are deriving appropriate value from their internal control functions. IA plays a fundamental role in this drive for added value.

How banks choose to respond to these challenges in the coming years will shape the impact that IA has on their entire organisation.

The traditional days of a ‘checks and balances’ approach are gone. IA functions can no longer rely on reactive annual reviews but must provide guidance on risk and its mitigation by harnessing data and analytics. It is critical that IA functions build a close working relationship with senior management and secures visible support from their audit committee. The more involved they become in strategy, leadership and steering committee meetings, the better positioned they are to add value.

Due to technological developments, new market entrants and rapid adoption rates by consumers, IA functions have had to evolve in order to stay relevant. They now need to balance a broad understanding of regulatory and financial reporting requirements with a detailed knowledge of the current issues, risks and controls that affect their organisation’s business lines.

To better understand how banks are responding to these demands, KPMG Ireland conducted a survey with the support of KPMG's ECB Office on DG1 and DG2 banks in 11 European countries subject to SSM Supervision. We surveyed 22 Heads of Internal Audit about the evolving role that their functions now play within banks. The survey included questions on the positioning of IA functions within their organisation, their mandate, reporting methods, the breakdown of headcount and how they structure their teams.

Apart from regulation and supervision, our survey shows that IA functions face two other major challenges. The first is technology. The rapid advance of digitalisation, data analytics, artificial intelligence and other technologies poses a number of problems for IA teams. The second major challenge is resourcing. Banks are finding it increasingly difficult to attract and retain suitably qualified and experienced IA staff.

The findings shed light on the key strategic priorities of IA functions for the next three years, as they balance between supporting supervision, retaining their independence, and adding value to the business.